Are you looking for an indication -- any indication -- that there is an increase coming in corporate and government information technology spending? If you are, take a look at second-quarter results for micro cap RCM Technologies
On the surface, the results look only modestly better. Realize that, because of the company's fiscal calendar, there were 14 weeks in last year's second quarter and only 13 this year (meaning there were roughly 7% fewer selling days). Still, revenue for the quarter rose 0.9% and net income finished up 34.4%, thanks mainly to improving gross margins.
RCM Technologies and its stock had been in a funk since the salad days of 1998. Since a severe downturn in 2000, the company has downsized. But it has a diverse blue-chip client list that includes 3M
The company's strategy targets the increasing complexity of IT installations. Because of the risk of implementation failure, clients need project management and consulting service help. As sound a business direction as that seems, the improving economy has not produced much of an increase in business -- until now.
RCM Technologies' CEO says the rise in revenue is "signaling an expansion in business activity. We are encouraged by these results and anticipate a more positive trend as we continue to focus on our core businesses and potential new growth opportunities." Though this is favorable as the company's results go, investors should make certain that this indicates the real deal; that is, that such results are the effect of revenue growth (in conjunction with effective cost management).
The results set the company's stock skyrocketing. In early trading today, RCM Technologies was the biggest gainer on the Nasdaq, up 68.2%. It had tapered off to a 23% gain in mid-afternoon trading.
The one analyst who follows RCM Technologies expects earnings of $0.37 this year and $0.50 a share in 2006 -- giving the stock, now trading at around $5.85 a share, a forward price-to-earnings multiple of 11.9. That's attractive if business is picking up and the company's cost controls allow it to continue to achieve percentage increases in net income that exceed revenue growth.